Wednesday, November 4, 2015

Value for money

Particularly on government project, I often hear the phrase 'value for money'. From time to time I've asked how it is measured. Often I get long vague replies, revealing that the answer from that person is 'I don't know'.

I think that there are three approaches to assessing value for money:

1. market comparison: for a similar service or product, what would a commercial organisation expect the market to offer for the service or product? Market comparison was something I used in the heady days of 'private financing' of public infrastructure.

2. opportunity cost-benefit: before I spend $n to achieve a certain result (service, product or capability), what other benefits could I obtain for spending that amount on something else. In some cases the answer would be a market comparison type answer, but it also would help the spender assess if the plan represented a good use of money.

3. capability for cost: somewhat like a QFD assessment, what capability am I getting for the cost? Particularly, am I paying for capability that I do not need and therefore paying too much? What then should I be paying for the capability I want? The question is answered by item 1 or 2 above.